What Is Comprehensive Financial Planning?
Have you ever wondered about the meaning of the term "comprehensive financial planning"? It’s generally agreed that a comprehensive plan should focus on all the areas of your financial life rather than specific financial goals that do not take into account the impact of other areas of your life.
If you are saving for retirement, for example, a comprehensive financial plan will also consider competing demands upon your income and cash flow. For example, a desire to accumulate education funds for a child could significantly affect your retirement savings. The amount of available income being lost to payment of income taxes will affect your ability to save. We believe your financial advisor should also assess your risk management and insurance, since your ability to save money for retirement can be undermined by financial reversals that are not covered properly by insurance.
A comprehensive financial plan allows your financial advisor to develop a plan that is personal to you and based on your ongoing needs, rather than a one-size-fits-all plan. You may need a plan that considers divorce or child custody arrangements, for example, or caring for adult parents, while someone else needs a plan that covers ownership of business assets. A tailored financial plan can provide much more depth than a general plan.
A comprehensive financial plan generally should cover 6 broad areas:
- Your cash flow and expenses – A thorough review of your monthly and yearly income and expenses is essential to understanding your financial life.
- Investment planning –Your savings and investments need to be in line with your goals.
- Retirement planning – A comprehensive retirement plan focuses on investments, tax planning, and when and where you plan to retire.
- Insurance – Your possessions and assets need risk protection.
- College planning – Parents and even grandparents often make college savings part of their financial plan due to the high costs of education and student loan debt pressures.
- Estate planning – Plans for your estate and beneficiaries should be an ongoing part of your considerations.
Understanding Client Objectives
A comprehensive financial plan must begin with a detailed understanding of your objectives. Are you saving for a first home, for example? A vacation home? Do you want to retire early? Do you want to leave a salaried job at some point and launch a small business? What is your family size? What do you want to accomplish in your career? Where do you see yourself in a decade? Two decades? Three?
All these questions, and similar ones, are related to your well-being and life goals. Each of them contains a financial component.
Both general savings and investments and retirement plans are usually invested in asset classes, such as cash (money market and certificates of deposit), bonds and stocks. Each of these asset classes has a distinct risk and reward profile. It’s crucial that your financial advisor have a good sense of your risk tolerance.
Cash instruments, for instance, have a very low risk; the principal is very stable. But the reward is also low; the return from interest on cash instruments, while reliable, is also quite low, no more than about 2 percent currently.
Bonds also carry low risk, because the price isn’t usually subject to significant swings. Bond prices are usually more stable than stock prices. But the reward profile is low also, since bond yields are on the low side as well. In today's environment of low interest rates, high-quality bonds may not provide returns greater than 3 to 4 percent per year.
Stocks offer a higher potential reward. The S&P 500, for instance, has returned more than 11 percent annually, on average, for the past four decades, even factoring in down years. The return on stocks far outpaces that of other asset classes. But stocks are also the most risky asset class. Bear markets, corrections in which stock market averages drop in price by 20 percent or more, happen periodically. Therefore, stocks have a place if you are emotionally capable to digest some ups and downs and your time horizon is sufficiently long to wait out what are inevitable downturns in the market.
Your financial advisor should ask you specific questions about your risk tolerance. Some people are uncomfortable with a large percentage of their portfolio(s) being in a risky asset class; others want to reap as much potential reward as possible. Most folks fall somewhere in the middle.
Regular Monitoring and Review
A comprehensive financial plan is based on goals, and as life circumstances and the outside world change, goals can also change. As a result, your goals, your life circumstances and your portfolios all need to be monitored regularly and reviewed periodically.
At Linscomb & Williams, we believe your financial advisor should go through your goals and plans thoroughly at least once a year, asking about any changes or updates. Your risk tolerance and asset allocation should be reviewed yearly as well, because your portfolio should be rebalanced to maintain optimal asset allocation.
Market Comments and Comprehensive Periodic Reports
It is also important to know how your portfolios are performing. We believe that a financial advisor should be prepared to provide you with comments on the bond and stock markets when you have questions, and should provide comprehensive periodic reports that show the progress of your portfolio.
At Linscomb & Williams, we publish new blog articles on a regular basis to keep our clients updated on the market, the financial services industry as a whole, common concerns and trending topics. Communication is key in this industry. Not only does it give our clients the peace of mind that their future nest eggs are being taken care of, but it also gives us the chance to see where you are, where you’re headed and if the steps to get there are still relevant.
Make sure to keep your financial advisor aware of any life-changing events, such as a divorce or marriage, the birth of a child or the inheritance of a large sum of money. Events like these can change your comprehensive financial plan, your goals for the future and your plans for retirement.
Linscomb & Williams is helping families in more than 35 states, and we've been doing so since the 1970s. We’ve experienced many different situations, market conditions and issues that arise. Whether you’re looking to consider a financial advisor for the first time or thinking about making a change, contact us to see how we can help.